[PDF] EUROPEAN COMMISSION Brussels 13.10.2021 COM(2021) 660

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EUROPEAN

COMMISSION

Brussels, 13.10.2021

COM(2021) 660 final

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN

PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE

REGIONS

Tackling rising energy prices: a toolbox for action and support 1

1. Introduction

The European Union, like many other regions in the world, is currently facing a sharp spike in energy prices. This is a high concern for citizens, businesses, the European institutions and governments all over the EU. particular, linked to the recovery. While energy price fluctuations have occurred in the past, today the EU emerges from the COVID-19 crisis. European households and companies face the prospect of higher energy bills at a time when many have been fragilised by loss of income from the pandemic. This can weigh on the recovery and its fairness and inclusiveness. It also risks undermining confidence and support in the energy transition required not just to avert disastrous climate change but also to reduce the EU vulnerability to fossil fuel price volatility. The European Commission wants to help and support addressing the negative impact on households and businesses, as a priority. Having listened to Member States and the European Parliament, it has prepared this communication to enact and support appropriate measures to mitigate the impact of temporary energy price rises. targeted measures to protect vulnerable consumers and mitigate the impacts on industry. Indeed, most Member States have already announced measures to address the current situation. The present toolbox allows a co-ordinated approach to protect those most at risk. It is carefully calibrated to meet the goal of addressing the negative effects of sudden price hikes and ensure affordability without fragmenting the European single energy market or jeopardizing investments in the energy sector and the green transition. While energy supply is not at immediate risk and the markets currently expect wholesale gas prices to stabilise at a lower level by April 2022, security of supply, gas storage levels and the proper functioning of the gas market need a particular monitoring ahead of the winter season. In addition to short term measures, this Communication provides an outlook onto coordinated measures the Commission considers to take over the medium-term to ensure a better

2. Energy prices

Due to cheaper fuels, subdued demand and rapidly expanding renewable generation, wholesale energy prices fell sharply in 2019 and negative electricity prices became widespread in 2020. This downtrend has been abruptly reversed in the course of this year. Wholesale electricity prices have increased by 200% on a yearly basis1. This in turn has driven up retail prices, but to a much lesser degree (+9% EU average until August 20212).

1 Compared to the average price in 2019, prices at the beginning of October 2021 have increase by 166%

for the benchmark EP5 (DE, ES, FR, NL) and Nordpool market (NO, DK, FI, SE, EE, LT, LV)

2 VaasaETT (https://www.vaasaett.com/)

2

2.1. What is causing the current spike?

The current electricity price increase is primarily due to global demand for gas soaring as economic recovery is picking up. Rising demand has not been matched by increasing supply with effects felt no only in the EU but also in other regions of the world. In addition, lower-than-expected gas volumes have been observed coming from Russia, tightening the market as the heating season approaches. Though it has fulfilled its long-term contracts with its European counterparts, Gazprom has offered little or no extra capacity to ease pressure on the EU gas market. Delayed infrastructure maintenance during the pandemic has also constrained gas supply. As natural gas prices are a fundamental determinant of electricity prices in most of the EU, these dynamics underpin most of the current increase in the latter. In addition, electricity prices also increased because of seasonal weather conditions (low water and wind over summer). This has resulted in lower production of renewables in Europe. The European carbon price has also risen sharply in 2021, albeit much less than the gas price. The effect of the gas price increase on the electricity price is nine times bigger than the effect of the carbon price increase3. The carbon price rose by around EUR 30 per tonne of CO2 this year, to the current level of around EUR 60 per tonne of CO2. The price rose because of higher demand for allowances due to higher economic activity following COVID-

19 and expectations linked to the 2030 climate ambition but not only. High gas prices

themselves contribute to an increasing carbon price since they lead to an increased use of coal for power generation and consequently higher demand for emission allowances. The ETS has in-built safeguards designed to address situations of excessive price fluctuations. While the conditions for triggering these measures are currently not met4, the Commission will continue to monitor the evolution of the carbon price. It is important to note that the carbon price from the ETS provides a fundamental incentive to switch to cheaper renewable energy, more energy efficiency and performing buildings, and to low-carbon energy sources, thus contributing in the longer term to lower wholesale prices and reduced vulnerability to global shocks like the current one.

3 From January 2021 to September 2021, the ETS price has increased by about 30 EUR / tCO2, which

translates into a cost increase of about 10 EUR / MWh for electricity produced from gas (assuming a

50% efficiency) and about 25 EUR / MWh for electricity produced from coal (assuming a 40%

efficiency). This is clearly outweighed by the observed increase of the gas price of about 45 EUR / MWh

over the same period, which translates into additional electricity production cost of about 90 EUR / MWh

4 Article 29a ETS Directive provides that if, for more than six consecutive months, the allowance price is

more than three times the average price of allowances during the two preceding years on the European carbon market, the Commission shall immediately convene a Committee meeting with Member States in order to discuss potential measures. 3 Natural gas still plays an important role in the EU energy mix. It currently represents around a quarter of the EU's overall energy consumption. Today, about 26% of that gas is used in the power generation sector (including in combined heat and power plants) and around 23% in industry. Most of the rest is used by households, and the service sector, mainly for heating and cooling5. Although we have witnessed fuel switching towards gas and renewables in recent years, while the share of nuclear remained at around 25% of the electricity mix, surging gas prices have at least temporarily reversed this dynamic back towards coal in some Member States despite it generating a higher CO2 intensity per MWh. dependency rate was 61% (56% in 2000). The high reliance on imports6 exposes the EU economy and key sectors to high fluctuations in the price of fossil fuels, which are traded on global markets. Gas prices are increasing globally, but more significantly in net importer regional markets like Asia and the EU. So far in 2021, prices tripled in EU and more than doubled in Asia while only doubling in the US.

2.2. The impact of high energy prices

though to different degrees and at different times. The link between wholesale and retail prices varies in each Member State and depends on the regulation and structure of retail prices and energy mix. The wholesale element typically makes up only a third of the final price, the rest being, transmission and distribution costs and taxes and levies. All else equal, where gas plays a greater role in the energy mix, retail prices were affected the most; where retail prices are

more closely tied to the wholesale price in their contracts, the effects were felt earlier.

Member States where longterm contracting is more common are likely to see a slower pass- through of the higher price increases over the coming weeks and months.

5 Natural gas can be imported into the EU either through pipelines from its source or transported in the

form of liquefied natural gas (LNG). The gas must be stored to balance fluctuations in daily and seasonal

demand. It also secures the supply of gas in the event of supply disruptions or particularly high demand.

The main advantage of stored gas is that it is available close to consumers and can be supplied without

delay.

6 Oil (97%), coal (44%) and gas (90%)

4 While the recent price hikes affect everyone, the energy poor and the low and lower- middle-income households are most impacted because they spend significantly higher shares of their incomes on energy7. Energy poverty has been closely monitored by the Commission. Based on the latest available data, in 2019, about 7% of the EU 27 population, i.e. 31 million people, were unable to keep their homes adequately warm, with significant differences between income groups and Member States. Moreover, 6% of the EU population lived in households with arrears on utility bills. Social and distributional effects depend on current contracts, as well as on regulatory frameworks, including existing safeguards protecting in particular vulnerable and energy- poor consumers. Such safeguards may include social and public policy measures, including

social tariffs, and other means in line with the EU internal energy market, notably the

Electricity Directive8 and the Gas Directive9 and guidance by the Commission10.

7 During COVID-19, 8 Member States (of 21 where data is available) saw a year-on-year increase in the

energy poverty rate in 2020, while 13 saw a decrease, including the 5 Member States with rates above

15% in 2019 (Bulgaria, Greece, Cyprus, Lithuania and Portugal)

8 Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules

for the internal market for electricity and amending Directive 2012/27/EU

9 Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning

common rules for the internal market in natural gas and repealing Directive 2003/55/EC

Gas & electricity price changes from in 2019-2021

BE BG CZ DK DE EE IE EL ES FR HR IT CY LV

Wholesale gas1 592% 159% 565% 554% 559% 264% 100% 11% 370% 562% N/A 406% N/A 271% Retail gas2 38% 23% 7% 51% 5% -12% 0% 28% 4% 25% 5% 14% N/A 25%

Wholesale

electricity3

306% 122% 227% 245% 259% 151% 343% 121% 271% 281% 153% 210% N/A 153%

Retail electricity2 21% 8% 15% 16% 5% 23% 14% 19% -8% 5% 3% -2% -2% 4%

LT LU4 HU MT NL AT PL PT RO SI SK FI SE EU5

Wholesale gas1 283% 572% 410% N/A 572% 462% 504% 0% -41% 52% 37% 289% 7% 429% Retail gas2 8% 17% -6% N/A 29% 19% -2% -4% 103% -1% -8% N/A 6% 14%

Wholesale

electricity3

154% 259% 143% 171% 273% 258% 83% 271% 121% 151% 206% 83% 135% 230%

Retail electricity2 17% 7% -5% 0% -20% 14% 3% -4% 48% 5% 9% 5% 17% 7%

1 Source: Hubs data and EUROSTAT (latest available data). The latest available data is September 2021 for countries with a

functioning hub (BE, BG, CZ, DK, DE, EE, ES, FR, IT, LV, LT, HU, NL, AT,PL, FI )

For the other Member States the data is from June 2021 (EUROSTAT) with the exception of SE (May 2021).

2 Source: VAASAETT (September 2021).

3 Source: ENTSO-E and multiple sources (September 2021).

4 Luxembourg wholesale data is based on Germany data for electricity and the Netherlands data for gas.

5 Different proxies were used for estimating EU benchmarks based on the data availability

5 Rising gas and electricity prices can also have major repercussions on industry and on SMEs. The impact of high energy prices is felt unevenly across sectors, with the surge in prices hampering production in industrial sectors while impact on services is more limited. The current situation further exacerbates the post-COVID 19 liquidity issues of some businesses and of SMEs in particular, with different impacts across sectors. High energy prices affect global and European supply chains with repercussions on production, employment and prices. Energy-intensive industries11 are hit hard. The fertilisers sector illustrates this point. Highly dependent on natural gas as a raw material, production in the sector has become unprofitable and was therefore cut back substantially over the last weeks. This in turn affects the jobs in the sector. Furthermore, lower fertiliser production is expected to temporarily result in higher food prices or lower margins for the food industry. An increase in energy prices is also having a significant and immediate impact on the transport and mobility sector, resulting in higher costs for drivers, passengers and for freight transport users. Global high energy prices can also lead to lower raw materials and component supplies if production is cut down. This in turn momentarily affects various EU manufacturers who depend on those components and materials, with the notable example of magnesium and the

EU car industry.

In terms of the macro economic impact, the sharp increase in energy prices has added to higher inflation. After several years, inflation has picked up markedly in the EU and many other advanced economies since the beginning of the year. This is mostly explained by

10 See Commission Recommendation (EU) 2020/1563 of 14 October 2020 on energy poverty

11 Energy costs account for a significant part of production costs in certain sub-sectors e.g. 71% of

production costs in fertilisers, 40% in primary aluminium, 31% in zinc and 25% in flat glass. 22,4
16,2 83,3
11,2 4,9 15,7 9,0 16,0 38,4

15,615,318,9

28,0
40,1

33,734,1

1,7

23,225,1

9,69,0

30,7
49,7
26,9

13,115,6

3,55,3

18,2 #N/A 13,2 51,1

9,08,48,26,2

15,2 34,4

19,617,819,1

26,3
47,5
15,9 38,4
4,5

14,013,911,3

4,9 11,5 38,0
19,9 8,2 28,6

4,34,9

20102019

Inability to keep home adequately warm (% of population below 60% of median equivalised income)

Source: Eurostat database

6 transitory factors, including the return of some commodity prices from their historic low levels back to, or above, their pre-pandemic levels, and supply bottlenecks for certain goods. As these drivers are expected to be transitory, inflation is expected to ease again as of next year. Overall, the EU economy is recovering faster than anticipated, and is set for continued growth in the short term. First-round effects on fiscal balances will depend on the extent to which fiscal revenues increase due to higher VAT collection on energy products and higher than expected revenues from the auction of emission allowances, on the one hand, and the magnitude of measures aimed at shielding end-users on the other, notably government transfer targeted at the vulnerable households or lowering of VAT.

2.3. Trends and expectations

Current market expectations on energy commodities12 indicate that the current price increases are likely to be temporary. Wholesale gas prices are likely to remain high over the winter months and fall from April 2022 onwards. The prices would remain, however, higher than the average of the past years13. While the current level of gas storage in Europe is tight14 it seems adequate to address supply risk in a winter similar to the previous one. Yet, the evolution of the weather during the winter season is a key variable to watch.

Use of storage capacity

Source: Gas Infrastructure Europe

The EU Regulation governing the security of natural gas supply15 lays down the framework for EU emergency preparedness and resilience to gas disruptions. It provides for information 12 2022.

13 Year-ahead: 42 EUR/MWh, two-year ahead: 35 EUR/MWh, three year ahead: 32 EUR/MWh

14 Current EU gas storage levels are slightly above 75%, below the 90% seen on average over the past 10

years. As of the 3th of October 2021. 7 exchange and regional cooperation and the development of contingency plans. The Regulation includes a solidarity mechanism that can be activated in extreme gas crisis situations. The Commission is regularly convening the gas security of supply network and constantly monitoring the situation at regional level. In the medium term, price fluctuations may continue and future temporary sharp changes cannot be ruled out as global supply and demand may not always adjust smoothly due to a geopolitical, technological and economic factors. The global electricity demand is set to grow by close to 5% in 2021 and 4% in 2022, driven by the global economic recovery. In Europe electricity demand is expected to increase in

2022 by almost 2%.

3. A toolbox of measures to help meet the challenge

The current price spike requires a rapid and coordinated response. The existing legal framework enables the EU and its Member States to take such action to address the effects of sudden price fluctuations. The immediate response should prioritise tailored measures that can rapidly mitigate the effects on the vulnerable groups, can easily be adjusted when the situation improves for these groups and avoid interfering with market dynamics or dampening incentives for the transition to a decarbonised economy. In the medium term, the policy response should focus on making the EU more efficient in the use of energy, less dependent on fossil fuels and more resilient to energy price spikes, while providing affordable and clean energy to end-users.

3.1. Immediate measures to protect consumers and businesses

Twenty Member States have taken or are envisaging taking measures, often with a focus on mitigating the impact on the most vulnerable, the smaller businesses and energy intensive industries. This includes price caps and temporary tax breaks for vulnerable energy consumers, or vouchers and subsidies for consumers and businesses. Such immediate measures could be partly financed from the revenue generated from the auctions of the EU ETS allowances, levies and taxes on energy prices, as well as through environmental taxes. In the current context, higher than expected ETS revenues can be used to finance the unforeseen needs for targeted social support. From 1 September 2020 to 30 August 2021, the revenues generated from the auctioning from EU ETS allowances16 amounted to EUR 26, 3 billion.

15 Regulation (EU) 2017/1938 of the European Parliament and of the Council of 25 October 2017

concerning measures to safeguard the security of gas supply and repealing Regulation (EU) No

994/2010

16 While ETS funds should primarily support further emission reductions through in particular investments

into energy efficiency measures, the energy transition and innovation in clean technologies, Article 10(3)

8

3.1.1. Emergency income support and avoiding disconnections from the grid

Member States can make specific social payments to those most at risk to help them afford their energy bills in the short term or provide for support for energy efficiency improvements, while ensuring effective market functioning. This could be done as lump-sum payments, so as to maintain the incentive to reduce energy consumption and invest in energy savings. In addition17, Member States can also put in place safeguards to avoid disconnections from the energy grid or can defer payments temporarily, where consumers face short-term difficulties in paying their bills. Several Member States introduced such measures at the beginning of the COVID-19 pandemic18 and these could now be extended.

19, the Commission will call

Member State representatives and energy regulators to engage on how to best protect, vulnerable consumers. This will enable Member States to exchange best practices and better focus measures to address energy poverty in step with related EU policies such as energy efficiency and the renovation wave.

Member States could:

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